Question

Marin Leasing Company signs an agreement on January 1, 2017, to lease equipment to Cole Company. The following information relates to this agreement.

1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.

2. The cost of the asset to the lessor is $230,000. The fair value of the asset at January 1, 2017, is $230,000.

3. The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $24,339, none of which is guaranteed.

4. The agreement requires equal annual rental payments, beginning on January 1, 2017.

5.Collectibility of the lease payments by Marin is probable.

Assuming the lessor desires a 8% rate of return on its investment, calculate the amount of the annual rental payment required. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and the final answer to O decimal places e.g. 5,275.) Amount of the annual rental payment

Answer 1

a) $230,000 $15,338 Fair value of leased asset to lessor Less: Present value of residual value (S24,339 * 0.63017) Amount to be recovered $214,662 $42.995 Amount of the annual rental payment (S214,662 / 4.99271) b) Date 1/1/17 1/1/17 1/1/18 1/1/19 1/1/20 1/1/21 1/1/22 12/31/22 Marin Leasing Company (Lessor) Lease Amortization Schedule Annual Interest on Recovery Lease Lease lease of lease Payment receivable receivable receivable Plus URV $230,000 $42.995 SO $42.995 $187.005 $42.995 $14,960 $28,035 $158.970 $42.995 $12,718 $30,277 $128,693 $42.995 $10.295 $32.700 $95,993 $42.995 $7,679 $35,316 $60,678 $42.995 $4.854 $38.141 $22,537 $24,339 $1,802 $22,537 SO $282,309 $52,309 $230,000 c) Date 1/1/17 Account Titles and Explanation Lease Receivable Cost of Goods Sold Sales Revenue Equipment (To record the lease) Debit Credit $230,000 $214.662 $214,662 $230,000 1/1/17 $42.995 Cash Lease receivable (To record the receipt of lease payment) $42.995 $14.960 12/31/17 Lease Receivable Interest Revenue $14,960 1/1/18 $42.995 Cash Lease receivable (To record the receipt of lease payment) $42.995 $12,718 12/31/17 Lease Receivable Interest Revenue $12,718